Declines in the venture capital market are hitting startups of all sizes, but the ones left particularly vulnerable are the thousands of young companies that raised seed funding during headier times just a year or two ago.
The seed frenzy peaked in the first quarter of 2015 when more than 1,500 startups raised their first rounds of capital, according to research firm PitchBook Data. Many of those companies are now running out of cash, and most won't be able to get more.
Dying is a fact of life for most startups, but corporate graveyards are filling more quickly this year. The pain is likely to drag on for another 12 to 18 months as early-stage companies fizzle out earlier than usual or limp along without access to more capital, said Gus Tai, a general partner at Trinity Ventures. "The pressure is even more acute," he said.
As many as half of fledgling startups today are looking to sell shares or take on convertible loans at the same price or terms as their previous rounds, said Jim Kim, a partner at Formation 8 who's raising as much as $200 million for a new venture capital fund called Builders. He said such deals were rare a couple of years ago, when enthusiasm was higher and VCs were willing to pay a premium. "It is a completely different environment now," Kim said.
More than 11,000 angel and seed investments were made in 2014 and 2015, PitchBook said. Since then, the market has become depressed at all levels, but the imbalance in earlier stages, especially the one known as "Series A," has created intense competition for survival among young companies. The number of companies able to raise their second or third rounds of funding fell 25 percent last quarter, compared with the same period in 2014, PitchBook said.
Etai Beck raised a seed round in 2014 for his corporate software company Folloze. He later sold more shares under the same terms, bringing the total of the round to $3.3 million. This year, as he looked for a second round of funding, he found that investors "are way stricter," with higher expectations for revenue and customers. The company eventually found its way to $7.3 million in September.
"The new, higher bar is fine for companies that have very recently raised seed capital -- they knew what to expect," Tim Bliamptis and Judith Elsea, partners at Weathergage Capital, wrote in a blog post in August. "It's not so fine for previously-seeded companies that had been operating under the old milestone expectations."
SundayMonday Business on 12/04/2016